While volatility and risk-based trends refuse to fade into the typical liquidity drain into year-end, the US dollar is giving in to the natural state of hibernation. That has lead the Dow Jones FXCM Dollar Index (ticker = USDollar) to delve in a tighter and tighter range above 9925. In fact, the Index has shown a progressively deteriorating range with the 10-day (two-week) average daily range dropping to the lowest level since we have high and low data. This deterioration in activity coincides with the multi-year lows from similar measures for the major dollar pairings and five-year FX Volatility Index. However, it is the lack of direction from the safe haven dollar that truly stands out. When we look at the bearing and performance of the currency market’s most liquid dollar-based pairings, we find a surprising consistency in trend – due to the strength or weakness of the greenback’s counterparts. Both EURUSD and GBPUSD extended their respective climbs to both set progress on a 0.5 percent run for the week. Alternatively, the high yield Aussie and kiwi have lost ground (0.3 and 0.6 percent) while the USDJPY maintains its rally.

The only thing that can give the dollar a fighting chance at self-generated strength (rather than playing foil to more ambitious peers) is a serious move towards risk aversion. There is little need for a safe haven when the market’s assessment of volatility – that the market will move aggressively in against a trader’s position – is at multi-year lows. Given most of the major uncertainties for the immediate future are behind us (GDP figures, Euro-area crises decisions, Fed stimulus refreshers), it is difficult to envision a particular catalyst. Of course, the Fiscal Cliff is a looming talking point, but the year-end deadline comes after speculators bow out of the market for the low turnover period. In fact, it looks more likely that a deal is done with President Obama offering a tax hike cap at $400,000 per year income while Speaker Boehner counters with a $1 million ceiling. It is still a serious gap, but showing movement indicative of an eventual deal. The question is whether risk will rally (dollar tumbles) should the US avoid the highly-publicized threat. Given the rally we’ve seen to this point, it seems largely priced in. In the meantime, we have only three more fully liquid days this week and a heavy volatility session on Friday (Quadruple Witching period). If speculators are going to book profit or balance the books before closing up shop for the remainder of the year, it will most likely look like ‘risk aversion’.

Japanese Yen Crosses Overtake Gap Highs as Abe Scrape Budget

The Japanese yen opened the week with a sharp gap lower that drop its various crosses to multi-month and multi-year year highs. After the aggressive decline the currency suffered through the past few months, this could have very well proven the exhaustion of an aggressive trend as the ‘buy the rumor, sell the news’ story played out for the Japanese election. However, the country’s new leadership is not resting on its laurels. Incoming Prime Minister Abe seems to recognize that if he doesn’t keep the pressure on, the currency will very likely normalize. Taking the initiative, the policy official this past session announced that he was removing the 71 trillion yen ($901 billion) budget spending cap imposed by the DPJ. This is seen as a stimulus preparation more. And, just so he is not mistaken in his intentions, Abe paid a visit to BoJ Governor Shirakawa to reiterate his desire for a 2 percent inflation target. This policy could be adopted this week, but the market is already pricing in an increase to the Asset purchase program. All that said, if risk aversion kicks in, these stimulus efforts won’t hold back the tide.

Euro Posts Another Market-Wide Advance, Watch Spain

Fundamentals are not that encouraging for the euro when we look beneath the surface, but that hasn’t stopped the currency from rallying against all but the franc. From the docket, we learned that Ireland’s economy grew in the third quarter (0.2 percent), a Spanish bond auction pulled lower yields (showing more market confidence) and Greece’s credit rating was returned to ‘B-‘ by S&P. However, the growth report missed consensus, the auctions were for short-term bills and the rating improvement comes to post restructure assets. Far more interesting was an update that showed Spanish bad loans hit a record 11.2 percent) and Catalan approved taxes on bank deposits – cementing its future in liquidity crisis.

British Pound Rallies to Two-Month High Before BoE Minutes

The British pound is up against most counterparts on the day and week Wednesday morning. Where last week, the currency was struggling for direction despite heavy event risk, it now climbs in the absence of fundamentals. The past session, we were met with the release of the consumer inflation (CPI) figures which printed at a high, 2.7 percent. This would be a point of contention for rate watchers…if the BoE were actually contemplating a hawkish move. We will see if this rate influence continues with the BoE minutes up and likely to squelch hike beliefs.

New Zealand Dollar Selling Off Ahead of 3Q GDP Report

The kiwi dollar has taken a tumble this week, and the only reason NZDUSD and NZDJPY have shown a deeper decline is the stubborn bearing on risk appetite that otherwise keeps the pairs in balance. If risk aversion kicks in, this drive will build on its own momentum. Yet, without it, we may very well see the move dry up. There is a secondary catalyst to be found though in the upcoming trading day: 3Q GDP. This is the level of catalyst that is good for a short-term volatility move - possibly a trigger though not independent trend developer. Watch this data against risk.

Australian Dollar Drops Despite Risk Bearings

Risk appetite trends have rocketed higher this week whether we are looking at the S&P 500 or Risk-Reward Index. And yet, AUDUSD has proven unable to take advantage. That is highly unusual given the position on the risk spectrum. It is difficult to establish whether this points to a disconnect from traditional risk trends or a vulnerability to a strong risk aversion shift. Perhaps we will find out if equities drop off highs.

The CBOE’s Volatility Index for gold hit a series low yesterday, suggesting extremely quiet markets. Of course, contrarians treat extremes as opportunities for the market’s to return to some level of normality, and in this case, that assumption proved accurate. The metal drop posted its biggest daily drop since November 2, though it ran right into the mid-point of 2012’s range and the 200-day moving average…

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

DEWR Internet Skilled Vacancies (MoM) (NOV)

-

-2.50%

4:30

JPY

All Industry Activity Index (MoM) (OCT)

0.20%

-0.30%

5:00

JPY

Leading Index (OCT F)

-

92.5

A second reading will unlikely result in market movement.

5:00

JPY

Coincident Index (OCT F)

-

90.6

9:00

EUR

Euro-zone Current Account s.a. (OCT)

-

0.8B

The surplus balance has fallen sharply as the region continues to slow.

9:00

EUR

Euro-zone Current Account n.s.a. (OCT)

-

3.5B

9:00

EUR

German IFO – Expectations (DEC)

96.4

95.2

Index has declined by 7.57% since March of this year. Economic woes in the region may continue to weigh on business.

9:00

EUR

German IFO - Business Climate (DEC)

102

101.4

9:00

EUR

German IFO - Current Assessment (DEC)

108

108.1

10:00

EUR

Euro-zone Construction Output s.a. (MoM) (OCT)

-

-1.4%

10:00

EUR

Euro-zone Construction Output w.d.a. (YoY)(OCT)

-

-2.6%

11:00

GBP

CBI Reported Sales (DEC)

25

33

An industrial retail support, expected to be another growth weight

12:00

USD

MBA Mortgage Applications (DEC 14)

-

-

13:30

USD

Housing Starts (NOV)

871K

894K

Look for the data to improve as the housing market continues to stage a recovery as the Fed provides support.

13:30

USD

Housing Starts (MoM) (NOV)

-2.60%

3.60%

13:30

USD

Building Permits (NOV)

875K

866K

13:30

USD

Building Permits (MoM)(NOV)

0.80%

-2.50%

13:30

CAD

Wholesale Sales (MoM) (OCT)

0.50%

-1.40%

14:00

CAD

Teranet/National Bank HP Index (NOV)

-

154.59

Home prices have recently come down.

14:00

CAD

Teranet/National Bank HPI (YoY)(NOV)

-

3.40%

15:30

USD

DOE U.S. Crude Oil Inventories (DEC 14)

-1000K

843K

Key cost for Americans, though prices have generally softened these past months

21:45

NZD

Gross Domestic Product (QoQ) (3Q)

0.4%

0.6%

Look for the New Zealand economy to continue to grow at a modest pace.

21:45

NZD

Gross Domestic Product (YoY) (3Q)

2.5%

2.6%

23:50

JPY

Japan Buying Foreign Bonds (Yen) (DEC 14)

-

-¥591.7B

Outflow of investment capital could help the forced stimulus efforts by the Japanese central bank and government

23:50

JPY

Japan Buying Foreign Stocks (Yen)(DEC 14)

-

-¥62.7B

23:50

JPY

Foreign Buying Japan Bonds (Yen)(DEC 14)

-

-¥31.1B

23:50

JPY

Foreign Buying Japan Stocks (Yen)(DEC 14)

-

¥116.5B

-:-

JPY

BOJ Holds Monetary Policy Meeting

-

-

Newly elected PM Abe spoke with BoJ Governor Shirakawa on Monday, but didn’t discuss monetary policy. Abe wants stronger easing by the central bank to devalue the yen and put an end to deflation.

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